I want to revisit the issue of the anti-dollarisation measure the Government embarked on in May 2012 and some of its results, especially in 2013.
Finance Minister Alexander Chikwanda signed Statutory Instrument (SI) number 33 of 2012 on May 7, 2012 which came into effect on May 18 2012, prohibiting the quoting and pricing of goods and services in foreign currency.
More than one year down the line, I had a discussion on the matter with two officials from Currency Exchange Fund (TCX) of Netherlands who were in the country recently.
TCX senior vice-president Per van Swaay, who was accompanied by another official, Gema Perez, gave me his impression of Zambia’s anti-dollarisation measures and some of its impacts.
Mr van Swaay started by saying that the financial market in Zambia is changing.
The current Government has passed a range of new pieces of legislation aimed at improving the sector’s functioning.
“Among them, unique in its kind, is SI number 33 of 2012 meant to promote the Kwacha as the sole currency for domestic operations.
“More than a year has passed since the instrument was approved. What have been the implications?”
Mr van Swaay wondered.
To answer the question he said there was need to take a step back and analyse the situation before the instrument became effective.
“(Then) The United States (US) dollar was the currency of preference for most domestic contracts, whether to sell 80 acres of land, or buy a gallon of gas.
“Applying that general practice, small and medium business tended to charge their products and services in dollar, creating dollar revenues.
“Accordingly, they felt comfortable attracting debt in dollars. All good, except that the end-consumers earned salaries in Kwacha and thus were the ones saddled with currency risk in their daily lives,” he said.
He said the point being, that if at the end of the value chain earnings are in Kwacha and at the top of the chain borrowings are in dollars, somewhere in the chain the cost of depreciation is felt.
As a result, an economy where this is general practice, is vulnerable to currency risk.
The SI 33 is helping to prevent that situation.
Mr van Swaay told me that since contracts should now be denominated in Kwacha that removes the currency risk from end-consumers and re-allocates it to small and medium enterprises, the ones that were typically indebted with dollar loans.
What happened to them?
They had two choices: either to remain indebted with an apparently cheaper dollar loan or convert their debts into Kwacha.
“I say ‘apparently cheaper dollar loan’ because the fact that interest rates of dollar loans are lower than interest rates of Kwacha loans, does not mean that these loans are cheaper.
“It actually may be quite the opposite! If company´s revenues are in Kwacha, which after implementation of SI 33 should be the case, the Kwacha has to be converted into dollar to service dollar debt.
This means that if the Kwacha depreciates, the initially cheap dollar loan can easily become an unmanageably expensive loan.
According to Mr van Swaay, the companies have responded to this new situation after SI 33 in different ways.
Some have decided to convert their dollar debt to Kwacha debt while others have opted to run the currency risk
He said, in summary, SI 33 was effective in de-dollarising the economy. According to him, another consequence of SI 33 is the increased demand for Kwacha funding from Zambian companies.
The key question now is how banks can serve this increased Kwacha funding need, especially that long-term funding, as may be required for productive investments, is generally scarce.
Long-term local currency liquidity is a precious asset, not always abundant. Banks get funding mostly from short-term deposits, while long-term funding, if any, this funding only comes in the form of hard currency loans from outside.
Often this is from development finance institutions and multilateral development banks.
Mr van Swaay said players such his organisations are willing to step in and help in that area.
A couple of weeks ago, the TCX visited Zambia on the mission.
TCX was created six years ago by the world’s main development banks which include the African Development Bank and Development Bank of Southern Africa.
Its role is to offer long-term hedge solutions. By doing that, the fund helps create access for Zambian banks and companies to the much-needed long-term Kwacha funding.
This will add to the efforts by other stakeholders, such as the Bank of Zambia in promoting a solid national currency.
Since today is Christmas, I would like to wish all a blissful celebration and may the remembrance of Christ’s birth bring you the joy, peace, hope and love of God!
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